case law & legislation affecting the construction industry (2011...

Construction Law Update:Case Law & Legislation

Affecting the Construction Industry(2011-2012)

Presented by

Division 10 – Legislation and EnvironmentMatthew J. DeVries

Editor

Stites & Harbison PLLC401 Commerce Street, Suite 800

Nashville, TN 37219(615) 782-2208

[email protected]

Angela R. StephensContributing Editor

Stites & Harbison, PLLC400 West Market Street, Ste. 1800

Louisville, KY 40202-3352(502) 681-0388

[email protected]

Keith J. BergeronDivision 10 Chair

Deutsch, Kerrigan & Stiles, L.L.P.755 Magazine Street

New Orleans, LA 70130(504) 581-5141

[email protected]

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TABLE OF CONTENTS

INTRODUCTION...........................................................................................................3

CONTRIBUTORS..........................................................................................................4

FIFTY-STATE UPDATE................................................................................................8

Alabama ........................................................................................................................8Alaska ...........................................................................................................................9Arizona........................................................................................................................11Arkansas .....................................................................................................................13California .....................................................................................................................14Colorado......................................................................................................................18Connecticut .................................................................................................................22District of Columbia .....................................................................................................31Florida .........................................................................................................................32Hawaii .........................................................................................................................36Idaho ...........................................................................................................................38Illinois ..........................................................................................................................40Indiana ........................................................................................................................43Iowa.............................................................................................................................44Kansas ........................................................................................................................46Kentucky .....................................................................................................................49Louisiana.....................................................................................................................52Maine ..........................................................................................................................56Maryland .....................................................................................................................58Massachusetts ............................................................................................................60Michigan......................................................................................................................61Minnesota....................................................................................................................62Mississippi...................................................................................................................86Missouri.......................................................................................................................93Montana ......................................................................................................................96Nebraska.....................................................................................................................97Nevada........................................................................................................................98New Hampshire.........................................................................................................102New Jersey ...............................................................................................................105New Mexico...............................................................................................................115New York...................................................................................................................115North Carolina ...........................................................................................................118North Dakota .............................................................................................................119Ohio...........................................................................................................................122Oklahoma..................................................................................................................131Oregon ......................................................................................................................132

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Pennsylvania.............................................................................................................134South Carolina ..........................................................................................................135South Dakota ............................................................................................................144Tennessee ................................................................................................................144Texas ........................................................................................................................147Utah...........................................................................................................................159Virginia ......................................................................................................................160Washington ...............................................................................................................161West Virginia .............................................................................................................162Wisconsin..................................................................................................................164Wyoming ...................................................................................................................167

FEDERAL UPDATE ..................................................................................................170

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INTRODUCTION

Division 10 is proud to present the Sixith Edition of the annual publication, Construction Law Update: Case Law & Legislation Affecting the Construction Industry (2011-2012).

This the third year that the Construction Law Update will be distributed exclusively in an electronic format along with the materials for the 2012 Annual Meeting in Las Vegas, Nevada. The Construction Law Update has become a hot item, requested by many construction practitioners throughout the country. Along with this year’s pudate, you can get access to the archive of previous updates (2006-2010) on the Forum’s eLibrary site at:

http://www.legalist.com/lasvegas2012/elibrary.html

If you are a regular contributor, we thank you again for your help and we look forward to another year of assistance. If you are a first time reader of the Construction Law Update and you see a “hole” where your state should be included, then perhaps you are the one to bring us updates throughout the year. It only takes a few hours of your time and you will be assisting your fellow colleagues tremendously. You could also be named as the state representative with Division 10’s Listserve for the Construction Law Update.

Personally, I would like to thank Angela Stephens for her work as an executive editor, providing invaluable time and advice for bringing this year’s update to publication. Angela works tirelessly throughout the year to make sure the updates “keep coming in” from the contributors. The Editorial Team would also like to thank all the volunteers and contributors for their efforts this year. Finally, we would be remiss if we did not thank Cherie Wickham of Stites & Harbison, PLLC, for her countless hours ofadministrative help this year.

The submissions in this publication are made throughout the 2011-2012 year, which means that some legislation may have passed, been rejected, or even tabled since the publication of this update. The case law and legislation included in this update are not intended to be an exhaustive compilation of every construction-related decision or legislative enactment from within a particular jurisdiction. We rely heavily on our authors to submit timely and accurate information. It is written by you and for you! If you would like to join this great team of contributors and authors, please contact one of our editors. Have a great year!

Matthew J. DeVriesEditor

www.legalist.com/lasvegas2012/elibrary.htmlhttp://www.legalist.com/lasvegas2012/elibrary.html

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CONTRIBUTORS

State Author

Alabama William Bradley Smith, Hand Arendall, LLC, 71 North Section St., Suite B, Fairhope, AL 36533, (251) 210-0609, [email protected]

Alaska Jessy Vasquez, Oles Morrison Rinker & Baker, LLP, 745 West Fourth Avenue, Suite 502, Anchorage, AK 99501, (907) 258-0106, [email protected]

Arizona James J. Sienicki , Michael Yates, Snell & Wilmer LLP, 400 E. Van Buren, Phoenix, Arizona 85004, (602) 382-6246, [email protected], [email protected]

Arkansas Benjamin B. Ullem, John F. Fatino, Whitfield & Eddy P.L.C., 317 Sixth Ave., Suite 1200, Des Moines, IA 50309, 515-288-6041, [email protected], [email protected]

A. Cale Block, Niswanger Law Firm, #5 Innwood Circle, Suite 110, Little Rock, AR 72211, 501-223-2888, [email protected]

California Sonia N. Linnaus, Watt, Tieder, Hoffar & Fitzgerald, L.L.P., 2040 Main Street, Suite 300, Irvine, CA 92614, (949) 852-6700, [email protected]

Colorado Andrea M. Bronson, The Holt Group LLC, 1675 Broadway, Suite 2100, Denver, Colorado 80202, (303) 225-8500, [email protected]

Connecticut Wendy K. Venoit,Steven Lapp, McElroy, Deutsch, Mulvaney & Carpenter, LLP, One State Street, 14th Floor, Hartford, CT 06103-3102, (860) 522-5175, [email protected], [email protected]

District of Columbia Arnie B. Mason, Esq., Watt, Tieder, Hoffar & Fitzgerald, L.L.P., 8405 Greensboro Drive, Suite 100, McLean, VA 22102, (703) 749-1000, [email protected]

Florida Scott P. Pence, Carlton Fields, P.A., 4221 W. Boy Scout Boulevard, Suite 1000, Tampa, FL 33607, (813) 223 7000, [email protected]

Hawaii Kenneth R. Kupchak and Tred R. Eyeryl,Damon Key Leong Kupchak Hastert, 1003 Bishop Street, Suite 1600, Honolulu, HI, 96813, (808) 531-8031, [email protected] and [email protected]

Idaho Meuleman Mollerup LLP, 755 W. Front Street, Suite 200, Boise, Idaho 83705, 208-342-6066, www.lawidaho.com

Illinois Jeffrey L. Hamera, Duane Morris LLP, 190 South LaSalle Street, Suite 3700, Chicago, IL 60603-3433, (312) 499 6700, [email protected]

Indiana Daniel P. King, Michael A. Rogers, Frost Brown Todd LLC, 201 N. Illinois Street, Suite 1900, Indianapolis, IN, (317) 237-3800, [email protected], [email protected]

Iowa Benjamin B. Ullem, John F. Fatino, Whitfield & Eddy P.L.C., 317 Sixth Ave., Suite 1200, Des Moines, IA 50309, 515-288-6041, [email protected], [email protected]

Kansas Heber O. Gonzalez, Polsinelli Shughart PC, 120 W. 12th Street, Kansas City, Missouri, 64105, 816-395-0634, [email protected]

Kentucky Steven M. Henderson, Angela R. Stephens, Stites & Harbison, PLLC, 400 West Market St., #1800, Louisville, KY 40202-3352, [email protected], [email protected]

www.lawidaho.com

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State Author

Louisiana Keith J. Bergeron, Scott J. Hedlund, Deutsch, Kerrigan & Stiles, L.L.P., 755 Magazine Street, New Orleans, LA 70130; (504) 581-5141, [email protected] and [email protected]

Maine Asha A. Echeverria, Michael R. Bosse, Bernstein Shur Sawyer & Nelson, 100 Middle Street, Portland, ME 04014, (207) 774-1200, [email protected], [email protected]

Maryland Paul Sugar and Ian Friedman, Ober | Kaler, 120 E. Baltimore Street, Baltimore, MD 21202, (410) 685-1120, [email protected] and [email protected]

Massachusetts Anatoly M. Darov, P.E., Esq., Burns & Levinson LLP, 125 Summer Street, Boston, Massachusetts, 617-345-3820, [email protected]

Michigan James R. Case, Kerr, Russell and Weber, PLC, 500 Woodward Ave., Ste 2500, Detroit, MI 48012, [email protected]

Minnesota Robert J. Huber, Robert L. Smith, Elizabeth A. Larsen, Ryan Stai, Steven Schemenauer, Kristin R. Sarff, and Thomas Cuthbert; Leonard, Street and Deinard, P.A., 150 South Fifth Street, Suite 2300, Minneapolis, MN 55402, (612) 335-1500, [email protected], [email protected], [email protected]

Mississippi John M. Lassiter, Christopher D. Meyer, Burr Forman LLP, 401 E. Capitol Street, Jackson, Mississippi 39201, (601)355-3434, [email protected], [email protected]

Kenton Andrews, Rhonda Caviedes Marshall, Andrews Myers PC, 3900 Essex, Houston,TX 77027, [email protected], [email protected]

Missouri Heber O. Gonzalez, Polsinelli Shughart PC, 120 W. 12th Street, Kansas City, Missouri, 64105, 816-395-0634, [email protected]

Montana Neil G. Westesen, Brad J. Brown, Crowley Fleck, PLLP, 45 Discovery Drive, Bozeman, MT 59718, (406) 556-1430, [email protected], [email protected]

Nebraska Monica L. Freeman, Woods & Aitken LLP, 10250 Regency Circle, Suite 525, Omaha, Nebraska 68114, (402) 898-7400, [email protected]; Kerry L. Kester, Brian S. Koerwitz, Woods & Aitken LLP, 301 South 13th Street, Suite 500, Lincoln, Nebraska 68508, (402) 437-8500, [email protected], [email protected]

Nevada David R. Johnson, Watt, Tieder, Hoffar & Fitzgerald, L.L.P., 3993 Howard Hughes Parkway, Suite 400, Las Vegas, NV 89169; (702) 789-3100, [email protected]

Michael W. Wadley, Holland & Hart LLP, 9555 Hillwood Drive, 2nd Floor, Las Vegas, NV 89134, T: (702) 669-4600, [email protected]

New Hampshire Asha A. Echeverria, Michael R. Bosse, Bernstein Shur Sawyer & Nelson, 100 Middle Street, Portland, ME 04014, (207) 774-1200, [email protected], [email protected]

New Jersey Lisa Lombardo, Gibbons P.C., One Gateway Center Newark, New Jersey 07102, 973-596-4481, [email protected]

Damian Santomauro, Gibbons P.C., One Gateway Center, Newark, New Jersey 07102, (973) 596-4473, [email protected]

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State Author

New Mexico Sean R. Calvert, Calvert Menicucci, P.C., 8900 Washington St., NE, Suite A, Albuquerque, NM 87113, (505) 247-9100, [email protected]

New York Ian M. Forshner, Lewis Brisbois Bisgaard & Smith, LLP, 77 Water Street, Suite 2100, New York, NY 10005, (212) 232-1300, [email protected]

North Carolina Eric H. Biesecker and David A. Luzum, Nexsen Pruet, PLLC, Greensboro, NC 27402, (336) 373-1600, [email protected] and [email protected]

Randall W. Reavis, Nexsen Pruet, PLLC, 701 Green Valley Road, Suite 100, Greensboro, NC 27408, (336) 373-1600, [email protected]

North Dakota John E. Sebastian, Eric B. Kjellander, Hinshaw & Culbertson LLP, 222 N. LaSalle Street, Suite 300, 312-704-3000, [email protected], [email protected]

Ohio Stanley J. Dobrowski, Calfee, Halter & Griswold, LLP, 1100 Fifth Third Center, 21 East State Street, Columbus, OH 43215, (614) 621-7003, [email protected]

Oklahoma Michael A. Simpson, Atkinson, Haskins, Nellis, Brittingham, Gladd & Carwile, P.C. , 525 S. Main, Suite 1500, Tulsa, OK 74103, (918) 582-8877, [email protected]

Oregon Jeremy T. Vermilyea, Catherine Brinkman, Schwabe, Williamson & Wyatt, PC, 1211 SW Fifth Avenue, Suite 1500, Portland, OR 97229. 503-222-9981, [email protected], [email protected]

Pennsylvania David Wonderlick, Daniel Broderick, Watt Tieder Hoffar & Fitzgerald, L.L.P., 8405 Greensboro Drive, Suite 100, McLean, VA 22102, (703) 749-1000, [email protected] and [email protected]

Rhode Island Christopher C. Whitney, Little Medeiros Kinder Bulman & Whitney, P.C. 72 Pine StreetProvidence, RI 02903, (401) 272-8080, [email protected]

South Carolina L. Franklin Elmore, Bryan Kelly, Elmore Wall Attorney’s at Law, 301 North Main Street, Suite 2000, Greenville, SC 29602, (864) 255-9500, [email protected], [email protected]

South Dakota Steven J. Oberg, Lynn Jackson Shultz & Lebrun, P.C., 909 St. Joe Street, Rapid City, SD, (605)-342-2592, [email protected]

Tennessee J. Brad Scarbrough, Law Office of Brad Scarbrough, PLC, 5214 Maryland Way, Suite 207, Brentwood, TN 37027, (615) 369-9996, [email protected]

Texas Misty H. Gutierrez, Thomas Feldman & Wilshusen, LLP, 9400 North Central Expressway, Suite 900, Dallas, Texas 75231, (214) 369-3008, [email protected]

Cathy Lilford Altman, Kate Glaze, Carrington, Coleman, Sloman & Blumenthal, L.L.P., 901 Main Street Suite 5500 Dallas, TX 75202, (214) 855-3000, [email protected] and [email protected]

Rhonda Caviedes Marshall, J. Michael Schiff, Andrews Myers, P.C., 3900 Essex Lane, Suite 800, Houston, Texas 77027-5198, (713)850-4200, [email protected], [email protected]

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State Author

Utah David W. Zimmerman, Holland & Hart LLP, 222 South Main Street, Suite 2200, Salt Lake City, UT 84101, (801) 799-5800, [email protected]

Virginia Kirk J. McCormick, WATT, TIEDER, HOFFAR & FITZGERALD, L.L.P., 8405 Greensboro Drive, Suite 100, McLean, VA 22102, (703) 749-1000, [email protected]

Washington Kelly M. Walsh, Schwabe, Williamson & Wyatt, P.C., 700 Washington St., Suite 701, Vancouver, WA, 98665, (360) 905-1432, [email protected]

West Virginia Mathew S. Casto, Marc J. Felezzola, Babst Calland Clements & Zomnir, 500 Virginia Street East, Charleston, WV 25301, 681-205-8888, [email protected], [email protected]

Wisconsin Kimberly A. Hurtado, Hurtado, S.C., 10700 Research Drive, Suite Four, Wauwatosa, WI 53226, (414) 727-6250; [email protected]

Wyoming David Duffy, Oles Morrison, 745 West Fourth Avenue, Suite 502, Anchorage, AK 99501, (907) 258-0106, [email protected]

Federal AuthorLegislation Allen W. Estes, III, Oles Morrison Rinker & Baker, LLP, 701 Pike Street, Suite 1700,

Seattle, WA 98101, (206) 623-3427, [email protected]

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CONSTRUCTION LAW UPDATE

Alabama

Case law:

1. The Lemoine Company of Alabama, L.L.C. v. HLH Constructors, Inc., ___ So. 3d___, 2010 WL 4679478 (Ala.), the Alabama Supreme Court held that “pay if paid” language in a subcontract creates an enforceable condition precedent. If that pay if paid condition precedent was not satisfied, the general contractor had no obligation to make a final payment of retainage to the subcontractor. As a secondary issue, the Court held that in light of the unsatisfied condition precedent the subcontractor could not recover on a theory of quantum meruit. During the course of construction, the general contractor Lemoine Company of Alabama withheld a 5% retainage with respect to the subcontractor HLH’s work on the project. HLH had contracted to do the plumbing work for a condominium construction project in Baldwin County. At the conclusion of the project, the owner failed to pay the general contractor retainage owed under the general contract. The general contractor was forced to sue the owner to recover the unpaid balance and in that lawsuit obtained a default judgment. At the time of the Lemoine v. HLH trial, the general contractor had not collected from the owner any portion of the default judgment. Pursuant to the express pay if paid clause in the subcontract, the general contractor had not paid the final monies owed to the subcontractor. The subcontractor subsequently brought suit. The case was tried without a jury and the trial court entered a judgment against Lemoine. Lemoine appealed and raised this issue: whether the owner’s payment to Lemoine of the balance owed under the general contract was a condition precedent to Lemoine’s obligation to pay HLH the balance owed under the subcontract. The Alabama Supreme Court agreed with the general contractor’s argument that the language in the subcontract clearly indicated that the subcontractor had assumed the risk of nonpayment by the owner and that the condition precedent was enforceable. The clause in the subcontract provided that payment to HLH was “subject to the express and absolute condition precedent of payment” by the project owner. Lemoine and HLH had “knowingly, clearly and unequivocally” entered into a subcontract whereby they agreed payment to the subcontractor was dependent upon payment by the owner to the general contractor. HLH argued to the Alabama Supreme Court without authority that it could recover based on a theory of quantum meruit because the general contractor had received the benefit of the subcontractor’s work and labor done and materials provided. However, the Court found that accepting this argument would render the pay if paid clause meaningless. The Court noted that when an express contract exists, an argument based on a quantum meruit recovery in regard to an implied contract fails. The Alabama Supreme Court reversed the trial court’s judgment and remanded the case for entry of judgment in favor of Lemoine.

Legislation:

1. Senate Bill Number 59 Alabama 2011 Regular Session. The bill amends §§ 6-5-221, 6-5-222, 6-5-225 and 6-5-227, Code of Alabama, 1975, reducing the statute of repose for actions against an architect, engineer or builder from 13 years to 7 years from the substantial completion of the construction of an improvement on or to real property. This Bill will become effective upon signature and approval by Governor Robert Bentley.

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2. Senate Bill 437, an amendment to the Prompt Pay Act, Ala. Code § 8-29-1, et seq. Alabama 2011 Regular Session. This new bill adds language to the current Prompt Pay Act which limits the amount of retainage that can be withheld in connection with any construction job in the State of Alabama, excepting construction projects for an electric utility regulated by the Public Service Commission. The act also sets a specific time limit on the payment of retainage. Features of the bill are as follows:

(a) Retainage is limited to a maximum of ten percent, and after 50 percent completion of the work has been accomplished, no further retainage shall be withheld. Ala. Code § 8-29-3(i)-(k).

(b) The owner shall release retainage to the contractor no later than sixty (60) days after completion of the contractor’s work as defined in the contract, or no later than sixty (60) days after substantial completion of the project, whichever occurs first. Ala. Code § 8-29-3(l)(1). “Substantial completion” is defined in the statute as “the stage in the progress of the project when the project or designated portion thereof is sufficiently complete in accordance with the contract documents with all necessary certificates of occupancy having been issued so that the owner may occupy or utilize the project for its intended purpose.” Ala. Code § 8-29-3(l)(2).

(c) The contractor shall release to his subcontractor the portion of the owner’s payment attributable to the subcontractor’s work no later than seven (7) days after the contractor receives the owner’s payment. Ala. Code §§ 8-29-3(l)(1) and 8-29-3(e).

(d) The penalty for withholding greater than ten percent retainage is that the payee shall be entitled to interest at the rate of one percent per month (twelve percent per annum) on the excess amount. Ala. Code § 8-29-3(i)-(k). Similarly, the penalty for not making timely payments under the terms of this statute shall be that the payee shall be entitled to interest at the rate of one percent per month (twelve percent per annum) on all amounts due from the time of the due date until paid. Ala. Code § 8-29-3(d).

(e) The Prompt Pay Act includes a provision for the recovery of attorney fees by the prevailing party in any actions to recover amounts due, including interest. Ala. Code § 8-29-6.

Submitted by: William Bradley Smith, Hand Arendall, LLC, 71 North Section St., Suite B, Fairhope, AL 36533, (251) 210-0609, [email protected]

Alaska

Case law:

1. In ASRC Energy Services Power and Communications, LLC v. Golden Valley Electric Company, Inc., ___ P.3d ___ 2011 WL 5288786 (Alaska 2011), the Alaska Supreme Court handled a dispute arising out of two competitively bid construction contracts. Global Power & Communications, LLC ("Global") filed a complaint after the award was made, seeking additional compensation of $5.7 million under the two contractors due to claims of owners delay and extra work. Global amended its complaint to include a claim under the Alaska Unfair Trade Practices and Consumer Protection Act ("UTPA") for concealing and misrepresenting the existence of technical data relating to subsurface conditions at the project.

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Before the trial, the Golden Valley Electric Association ("GVEA") moved for judgment on the pleadings, alleging that UTPA did not apply to construction contracts, as the contracts were complex transactions between business entities that did not implicate consumer protection. The trial court denied the motion and held that UTPA was applicable to the dispute. Global, after consulting with a damages expert, amended its complaint and reduced its claims to approximately $3.2 million. GVEA also amended its answer and alleged counterclaims that it had suffered damages as the result of the Global violating the UTPA by presenting requests for additional compensation ("RFI") that were false.

At trial, the court held that the Global had engaged in unfair trade practice and awarded GVEA treble damages and attorneys' fees under the UTPA. On appeal, Global argued that the trial court had abused its discretion, its conduct was insufficient to support liability under the UTPA, and that the attorneys' fees were not properly segregated.

The Alaska Supreme Court upheld the trial court's ruling regarding the UTPA violation; however, the court reversed the award of damages and attorneys' fees. The court held that GVEA could not pursue damages for UTPA claims for actions by Golden in the present litigation or for fees incurred in defending the suit. The UTPA only allowed damages that were incurred pre-litigation.

2. In 3-D & Co. v. Tew's Excavating, Inc., 258 P.3d 819 (Alaska 2011), a Developer hired a Contractor to construct roads in a new subdivision. After the project was completed, the Developer inspected the work and determined that it was ready for the Subdivision's inspection. The Developer never informed the Contractor that the work was insufficient or incomplete or even expressed any dissatisfaction with the work until nearly a year after project completion. Further, the Contractor was never informed that the Subdivision's inspection resulted in a punch list, nor was given the opportunity to fix the minor items listed.

The Developer later filed suit against the Contractor for breach of contract, claiming the road work was deficient and improperly widened. The Developer, however, did not present any specific evidence to its costs to fix the areas. The lower court held that although the Contractor had breached its contractor, the Developer failed to prove damages.

The Alaska Supreme Court upheld the lower court's decision, noting that party seeking damages must present sufficient evidence of its damages to provide a reasonable basis for the award. The amount of damages does not need to be exact, but there must be some evidence upon which to base an award. As the Developer failed to provide estimates of its costs to repair the road, the court concluded that there was a failure of proof of damages barring the Developer's recovery.

3. In Handle Construction Co., Inc. v. Norcon Inc., ___ P.3d ___, 2011 WL 5107129 (Alaska 2011), a dispute arose over a solicited bid from a Subcontractor to perform concrete work on a project for a Contractor. The Contractor emailed the Subcontractor the bid solicitation, the drawings, and a bid schedule. The general manager of the Subcontractor printed the bid schedule, but not the email, and had another employee estimate the costs of the project. The Subcontractor subsequently was awarded the project and began work in September 2008.

In October 2008, after a trip to the project site, the Subcontractor notified the Contractor that there was a discrepancy between the bid schedule and the project drawings. The Subcontractor alleged that it did not realize that the word "foundation" in the Contractor's bid

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schedule was intended to mean a two-pier foundation, rather than a one-pier foundation. The Subcontractor requested a change-order under the contract to correct the alleged discrepancy.

The Contractor refused to pay and the Subcontractor filed a complaint, alleging defective specifications and damages resulting from the discrepancies between the bid schedule and the project drawings. The lower court granted the Contractor's motion for summary judgment on the basis that the Subcontractor had committed a unilateral mistake and bore the risk for its error. The lower court entered a final judgment for the Contractor, holding that there were no further claims remaining for trial.

On appeal, the Alaska Supreme Court concluded that the legal theory of implied warranty of specifications (also known as the Spearin doctrine) was not applicable to the case. There was no dispute that the drawings required a two-pier foundation and the Subcontractor produced the product it meant to produce. The court concluded that the Subcontractor bore the risk for the unilateral mistake of not diligently reviewing the materials provided to it by the Contractor, not seeking clarifying instructions. The estimator never read the contents of the clarifying email because the general manager never even provided him with the email.

Thus, as the risk of mistake should be borne by the party who has the greater interest in the consequences of a contract term, the court concluded that the Subcontractor should bear the risk of unilateral mistake in this case.

Submitted by: Jessy Vasquez, Oles Morrison Rinker & Baker, LLP, 745 West Fourth Avenue, Suite 502, Anchorage, AK 99501, (907) 258-0106, [email protected]

Edited by: J. Todd Henry and Allen W. Estes, III, Oles Morrison Rinker & Baker, LLP, 701 Pike Street, Suite 1700, Seattle, WA 98101, (206) 623-3427, [email protected]; [email protected]

Arizona

Case law:

1. In William Smith v. Krishna Pinnamaneni et al., 2011 Ariz.App. LEXIS 59, 607 Ariz.Adv.Rep. 35, (2011), the Arizona Court of Appeals held that the defense of lack of licensure could be waived if not timely and appropriately raised in an arbitration proceeding. Accordingly, the Court rejected defendants’ claims that the plaintiff contractor was not appropriately licensed and therefore was precluded by statute from pursuing its affirmative claim when defendants first raised the defense after plaintiff moved to confirm the arbitration award. The Court noted that contracts executed by unlicensed contractors are voidable, not void, and that unlicensed contracting constituted an affirmative defense that could be waived like any other affirmative defense.

2. In Charles Leflet v. Redwood Fire and Casualty Insurance Company, 600 Ariz.Adv.Rep. 6, 247 P.3d 180 (App.2011), the Court addressed the outer boundaries of Morrisagreements and notice requirements, particularly in a multi-insurance scenario. Under a Morris agreement, an insured stipulates to allow judgment to be entered against it by the plaintiff by default or stipulation. The insured further agrees to assign all rights it may have under its liability insurance policy to the plaintiff. For its part, the plaintiff provides a covenant not to execute upon any of the insured's assets and agrees to collect the judgment only from the liability insurance. The plaintiff then asserts a breach of contract/declaratory judgment action against the insurer as an assignee to the insured.

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In this case, a developer/general contractor and its primary insurer settled with class-action plaintiffs for less than the policy limits of the applicable policy ($375,000 when the developer possessed a $1,000,000 per occurrence policy), stipulated to an $8.475 million judgment with a covenant not to execute, and assigned their contractual rights against the subcontractors and the subcontractors’ carriers, who were contractually obligated to insure the developer/general contractor from harm caused by the subcontractors. The rights that the developer/general contractor and its primary insurer were to assign included their contribution rights from non-participating insurers for the developer/general contractor’s unpaid attorneys’ fees, the developer/general contractor’s right to pursue bad faith claims against the non-participating insurers, rights against the non-participating insurers to which the developer/general contractor had tendered its defense, and any contractual or other right to indemnity against the subcontractors, non-participating insurers, or any other insurer of the subcontractors. The non-participating insurers intervened in the settlement, claiming that the developer/general contractor had not provided requisite notice under Morris and thus breached the cooperation clause of its insurance policies. The non-participating insurers further argued that the settlement agreement did not qualify as a Morris agreement.

The Court of Appeals upheld the trial court’s entering of summary judgment in favor of the non-participating insurers, holding that "an insurer that reserves its rights may not employ Morris to reduce its liability below policy limits, and an insured that facilitates such an effort breaches its duty to cooperate with its other insurers." The court held that "[b]ecause Morris agreements are fraught with risk of abuse, a settlement that mimics Morris in form but does not find support in the legal and economic realities that gave rise to that decision is both unenforceable and offensive to the policy’s cooperation clause." As to notice, the court held: “Because an insurer who defends under a reservation of rights is always aware of the possibility of a Morris agreement, the mere threat of Morris in the course of settlement negotiations does not constitute sufficient notice. Instead, the insurer must be made aware that it may waive its reservation of rights and provide an unqualified defense, or defend solely on coverage and reasonableness grounds against the judgment resulting from the Morris agreement."

3. In North Peak Construction v. Architecture Plus Ltd., 2011 Ariz.App.LEXIS 57, 607 Ariz.Adv.Rep. 20 (2011), the Court of Appeals held that contractors that rely on plans and specifications prepared by architectural companies can assert breach of implied warranty claims against architectural companies. The Court of Appeals held that implied warranty claims made by contractors against design professionals were initially recognized in Donnelly Constr. Co. v. Oberg/Hunt/Gilleland, 139 Ariz. 184, 677 P.2d 1292 (1984), overruled on other grounds by Gipson v. Kasey, 214 Ariz. 141, 150 P.3d 228 (2007), and that such claims sound in contract, not tort, due to the similarity of defective design claims to claims arising from the implied warranty of habitability and workmanship found in other Arizona cases. The Court of Appeals further held that contractors may assert claims for breach of implied warranty against individual architects who sign and seal defective plans, even though the architects were not personally parties to the contract between the property owners and the architectural firms. The Court, however, did not address the issue of whether a different statute of limitations exists for negligence and implied warranty claims. Finally, the Court of Appeals stated that while claims for breach of the implied warranty recognized in Donnelly "arise out of a contract, express or implied," the contract is implied in law and therefore does not likely "arise out of contract" under 12-341.01(A) for purposes of awarding attorneys’ fees.

Submitted by: James J. Sienicki , (602) 382-6351, and Michael Yates, (602) 382-6246, Snell & Wilmer LLP, 400 E. Van Buren, Phoenix, Arizona 85004, [email protected], [email protected]

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Arkansas

Case law:

1. In Lexicon, Inc. v. ACE Am. Ins. Co., 634 F.3d 423 (8th Cir. 2010), a contractor sued an insurance company alleging it was obligated under commercial general liability policies (CGL) to cover property damage. The millions of dollars of property damage occurred when a silo, negligently built by the contractor’s subcontractor, collapsed. The Eighth Circuit Court of Appeals found that the district court overstated the Arkansas Supreme Court’s ruling in Holder. Rather, Holder allows the insurer to deny the contractor’s claims of coverage for damage to the silo since that would be foreseeable. However, absent some other defense the insurance company would be obligated to reimburse the contractor for all property damage other than the silo.

Submitted by: Benjamin B. Ullem and John F. Fatino, Whitfield & Eddy P.L.C., 317 Sixth Ave., Suite 1200, Des Moines, IA 50309, 515-288-6041, [email protected], [email protected]

2. In Chenal Restoration Contractors, LLC v. Linda Diane Carrol and Trade Wynds Imports, Inc. (Arkansas Court of Appeals, Divisoin IV, CA 10-893), the Arkansas Court of Appeals addressed the amount of interstate commerce necessary to trigger the application of the Federal Arbitration Act (the “FAA”) as opposed to the Arkansas Uniform Arbitration Act (the “AUAA”).

Chenal Restoration Contractors, LLC (“Chenal”) entered into a written agreement with Trade Wynds Imports, Inc. (“TWI”) wherein Chenal agreed to repair TWI’s tornado-damaged roof. TWI failed to make full payment, so Chenal initiated arbitration proceedings pursuant to the parties’ agreement. Chenal also filed suit in the Circuit Court of Arkansas County to prevent the running of the statute of limitations. Chenal withheld service on TWI in order to prevent TWI from unnecessarily expending time and effort on the lawsuit, since Chenal intended to proceed with arbitration. However, TWI was notified of Chenal’s suit by a third party and TWI filed an answer without being served. TWI also filed a counterclaim against Chenal, alleging that Chenal and its principal committed numerous torts against TWI and its owner.

The parties’ agreement did not state whether it was governed by the Federal Arbitration Act (the “FAA”) or the Arkansas Uniform Arbitration Act (the “AUAA”). The determination of which act applied would determine the appropriate forum for the suit, as the FAA allows for the arbitration of tort claims, whereas the AUAA does not. Pursuant to the AUAA, contract claims may be submitted to arbitration, but any tort claims arising from the transaction must be tried in court. The trial court denied Chenal’s motion to compel arbitration and Chenal appealed.

On appeal, Chenal argued that interstate commerce was implicated, thereby triggering application of the FAA, because Chenal purchased supplies from out of state vendors, subcontracted with a Florida company to perform part of the labor, and dealt with TWI’s out-of-state insurance company. TWI argued that it did not consent to Chenal’s dealings with out-of-state parties, that it did not contemplate a connection with interstate commerce, and that Chenal’s actions were not sufficiently linked with interstate commerce; thus, according to TWI, the AUAA applied.

The Arkansas Court of Appeals noted that the reach of the FAA extends to the full extent of the Commerce Clause’s power. Therefore, even though the connection to interstate

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commerce was “very slight,” the FAA applied to the parties’ dispute and both Chenal’s claim and TWI’s counterclaim were subject to arbitration.

Chenal also argued that TWI’s claims were misstated breach of contract claims, incorrectly framed as torts in order to avoid arbitration. Because the court reversed on other grounds, it did not reach Chenal’s second argument.

Submitted by: A. Cale Block, Niswanger Law Firm, #5 Innwood Circle, Suite 110, Little Rock, AR 72211, 501-223-2888, [email protected]

Legislation:

1. Act 1208 of 2011; Ark. Code Ann. §§ 17-25-501, et. seq. Act 1208 amended the law concerning the Arkansas Residential Building Contractors Committee (the “Committee”) and expanded the scope of the licensing requirement for construction and repairs to single-family residences. In brief, any person or organization conducting repairs, remodeling, or renovation to a single family residence must be licensed by the Committee. The amended statute identifies individuals and organizations conducting repairs, remodeling and renovations as “home improvement contractors” (“HWCs”). Exceptions to the licensing requirement include:

• An individual may act as his or her own building contractor, so long as he or she does not build more than one residence per year.

• An individual may act as his or her own HWC on his or her own property.• A person or entity need not be licensed if the work to be done does not

exceed $2,000.00 in value.• Subcontractors of properly licensed contractors are exempt from the

licensing requirement.• Contractors licensed by Arkansas agencies other than the Arkansas

Residential Building Contractors Committee are exempt, so long as the work they perform is within the scope of their license.

The penalty for an HWC doing construction work without a license is up to $400.00 per day. The new licensing requirements go into effect on January 1, 2012. At that time, an HWC applying for a license will be required to pass a licensing test. However, if an HWC applies for a license during the grandfathering period of July 27, 2011 until December 21, 2011, no test will be required.

Submitted by: A. Cale Block, Niswanger Law Firm, #5 Innwood Circle, Suite 110, Little Rock, AR 72211, 501-223-2888, [email protected]

California

Case Law:

1. Cortez v. Abich, 51 Cal. 4th 285, 246 P.3d 603, 120 Cal. Rptr. 3d 520 (2011). In Cortez v. Abich, the California Supreme Court held that the California Occupational Safety and Health Act of 1973 (“Cal-OSHA”) applies to homeowners, making them the “employer” of an unlicensed contractor and the unlicensed contractor’s employees. 51 Cal.4th at 295.

In Cortez, homeowners hired an unlicensed general contractor to remodel their home. That general contractor hired the plaintiff to help demolish the roof. The plaintiff suffered injuries

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when a portion of the partially demolished roof collapsed, causing him to fall. The plaintiff sued the homeowners in tort for alleged violations of the safety standards required by Cal-OSHA for employers. At trial, the homeowners argued that the work safety requirements of Cal-OSHA did not apply to their residential project. Id. at 290. The trial court agreed, finding that the homeowners were not plaintiff’s employers and, as homeowners, they were not required to comply with Cal-OSHA. Id. The Court of Appeal concluded that the homeowners were employers, but that the project fell within Cal-OSHA’s household domestic service exclusion. Id.

The California Supreme Court considered whether work done on a residential remodeling project qualifies as a “household domestic service” exclusion from the definition of employment under Cal-OSHA. Id. at 288-289. California Labor Code section 6303 defines employment under Cal-OSHA as “the carrying on of any trade, enterprise, project, industry, business, occupation, or work, including all excavation, demolition, and construction work, or any process or operation in any way related thereto, in which any person is engaged or permitted to work for hire, except household domestic service.” The Court concluded that the labor for the home remodeling project entailed “the carrying on of a project or work that involved demolition and construction work,” such that it qualified as employment under Labor Code section 6303. Id. The Court narrowly viewed “household domestic service” as the maintenance of a household or its premises, concluding that work performed on a remodeling project “calling for the demolition and rebuilding of significant portions of a house and the construction of new rooms” was not “household domestic service.” Id. at 298. Therefore, Cal-OSHA did apply to the homeowners. Id.

Notably, the Court declined to consider whether the Legislature intended for Cal-OSHA to apply to homeowners, leaving a number of policy arguments unresolved. See id. at 297-298. For now, whether a homeowner qualifies as an employer under Cal-OSHA will require a consideration by the courts of the “totality of the circumstances, including, but not limited to, the scope of the project and the extent to which it involves significant demolition and construction work.” Id. at 295, n. 4. This case demonstrates yet another reason for homeowners to ensure that they hire a properly licensed contractor for any home remodeling projects in order to avoid potential liability under Cal-OSHA as an “employer.”

2. Anders v. Superior Court (Meritage Homes of California), 192 Cal.App.4th 579, 121 Cal.Rptr.3d 465 (2011). In Anders v. Superior Court, the Court of Appeal held that a builder who elects to create contractual prelitigation procedures cannot later compel the homeowners to comply with the statutory prelitigation procedures provided in California Civil Code sections 895-945.5 if its contractual prelitigation procedures are deemed unenforceable. 192 Cal.App.4th at 589.

In this case, the homeowners of 54 homes built by Meritage Homes of California (“Meritage”) filed a complaint seeking remedies for alleged construction defects in their homes. Meritage filed a motion seeking to compel those homeowners who purchased their homes pursuant to a sales contract containing alternative prelitigation procedures to comply with those procedures. The trial court found that the procedures set forth in the sales contract were unconscionable and unenforceable. Id. at 584. However, the trial court required that the homeowners comply with the statutory prelitigation procedures found in California Civil Code sections 895 et seq. (“SB 800”), which sets out a nonadversarial prelitigation procedure by which the homeowners alleging construction defects must give the builder notice and an opportunity to investigate and repair prior to initiating a court action seeking remedies. Id.

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The homeowners petitioned for a writ of mandate, arguing that under SB 800, if a builder’s alternative procedures are found to be unenforceable, then the builder may not enforce the statutory prelitigation procedures so that the homeowners could file suit without first complying with those statutory procedures. Id. The Court of Appeal agreed with the homeowners. Id. at 589. The Court looked at Civil Code section 914, which provides that “if a builder attempts to commence its alternative contractual procedures, it may not, in addition, require adherence to the statutory procedures regardless of whether the builders’ own alternative nonadversarial contractual provisions are successful in resolving the dispute or ultimately deemed enforceable.” Civil Code section 914 further provides that the builder must give the buyer notice at the time the sales agreement is executed of its election to either use the statutory prelitigation procedure or its own contractual procedure, which election is binding regardless of whether the alternative contractual procedure is successful in resolving the dispute. The Court interpreted these provisions to mean that if the builder elects or attempts to use its own prelitigation procedures, it is bound by that decision and it may not then enforce the statutory provisions. Id.

This case illustrates the potential dangers of drafting contractual prelitigation procedures that might waive statutory rights. Builders may be more likely to choose the statutory prelitigation procedures rather than trying to insert their own contractual procedures that might not withstand judicial scrutiny. Moreover, homeowners may be more likely to ignore the contractual prelitigation procedures contained in these types of contracts and argue that they are unconscionable and unenforceable.

3. Tverberg v. Fillner Construction, Inc., 193 Cal.App.4th 1121 (2011). In Tverberg v. Filler Construction, Inc., the Court of Appeal held that a general contractor may be directly liable for an independent contractor’s injuries where the general contractor negligently exercises control of jobsite safety that contributed to the independent contractor’s injuries. 193 Cal.App.4th at 1129.

In Tverberg, the general contractor on a project to expand a commercial fuel facility hired a subcontractor to construct a metal canopy. The subcontractor delegated the work to another subcontractor, who, in turn, hired Tverberg, an independent contractor, as foreperson. On Tverberg’s first day on the job, another subcontractor hired by the general contractor had dug holes for bollard footings at the general contractor’s direction. These holes were marked with stakes and safety ribbon. Tverberg asked the general contractor to cover the holes with large metal plates, but the general contractor declined, stating that it did not have the necessary equipment to do so. Tverberg fell into a bollard hole and was injured. He filed a personal injury lawsuit against the general contractor alleging causes of action for negligence and premises liability.

The trial court found that: (1) an independent contractor could not hold the general contractor vicariously liable on a peculiar risk theory; and (2) the general contractor could not be held directly liable for failing to cover the holes because Tverberg was aware of the danger. Id.at 1125-1126. The case progressed to the California Supreme Court, which held that an independent contractor hired by a subcontractor may not hold the general contractor vicariously liable on a peculiar risk theory. Id. at 1126, see also Tverberg v. Fillner Construction, Inc., 49 Cal.4th 518 (2010). The Supreme Court remanded the case to the Court of Appeal to determine whether the general contractor could be held directly liable on a theory that it maintained control over safety conditions at the jobsite. 193 Cal.App.4th at 1126.

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The Court of Appeal stated that the imposition of tort liability on the general contractor turned on whether it exercised retained control over safety conditions at a jobsite in such a manner that affirmatively contributed to the independent contractor’s injury. Id. at 1127. This requires more than a general contractor passively permitting an unsafe condition to occur. Id. The Court concluded that by ordering the bollard holes to be dug and requiring Tverberg to conduct work near those holes, the general contractor’s conduct “may have constituted a negligent exercise of its retained control in a manner that could have made an affirmative contribution to Tverberg’s injury. Id. at 1128-1129. Moreover, the Court concluded that there was further evidence to suggest that the general contractor may have affirmatively contributed to the injuries, including evidence that the general contractor assumed responsibility for the safety of workers near the holes by placing stakes and safety ribbon around the holes, and that the general contractor had failed to cover the holes even after being asked to. Id. at 1129.

The Court of Appeal further concluded that the general contractor was liable for Tverberg’s injuries because it breached a nondelegable duty created by the California Occupational Safety and Health Act of 1973 (“Cal-OSHA”) that all pits be barricaded or securely covered. Id. at 1130. The Court found that since the general contractor directed another subcontractor to dig the holes and was generally responsible for safety conditions on the jobsite, the general contractor had a nondelegable duty to ensure that the holes be barricaded or covered. Id. The Court concluded that the general contractor’s breach of this duty could form the basis of direct liability for the independent contractor’s injuries. Id.

This case expands the potential liability of general contractors for injuries that occur on jobsites and places a general contractor at greater risk of direct liability to independent contractors. General contractors must take great care when dealing with subcontractors and independent contractors.

Statutes:

1. SB 392, Contractors: Limited Liability Companies.

SB 392 amends California’s contractor’s license law to authorize the Contractors’ State License Board ("CSLB”) to issue contractor’s licenses to limited liability companies, which were were previously precluded from holding a contractor’s license law. Effective January 1, 2011, the CSLB must begin processing applications from LLCs by 2012.

SB 392 provides for heightened bonding and insurance requirements for LLC licensees. An LLC licensee must have on file a surety bond in the sum of $100,000 for damages arising out of employee wage and benefit claims. Moreover, LLC licensees must maintain liability insurance for errors and omissions and give notice of this policy to homeowners.

2. SB 189, Mechanic’s Liens.

SB 189 causes the repeal of California’s existing mechanic’s lien statutes found at Civil Code §§ 3082-3267, and restructures and rephrases the lien laws. The majority of the provisions of SB 189 will take effect on July 1, 2012. Some of the more substantive changes include: (1) revision of the forms for conditional and unconditional waivers and releases; (2) removal of the cap on attorneys’ fees awarded to the prevailing party on a petition to expunge or remove a lien; (3) a general contractor must give a 20 day preliminary notice to construction lenders on private works; (4) “acceptance by owner” shall no longer be the equivalent of

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“completion”; and (5) where there are multiple direct contractors on a project, the owner may record a separate notice of completion with respect to the scope of work under each direct contract.

Submitted by: Sonia N. Linnaus, Watt, Tieder, Hoffar & Fitzgerald, L.L.P., 2040 Main Street, Suite 300, Irvine, California 92614, Tel: (949) 852-6700, [email protected]

Colorado

Case law:

1. In Hildebrand v. New Vista Homes II, LLC, ___ P. 3d. ___ , Nos. 08CA2645 and 09CA0695, 2010 WL 4492356 (Colo. App. 2010)(NYRFOP) (petition for certiori pending), the Colorado Court of Appeals considered the proper measure of damages for a construction defect claim under Colorado’s Construction Defect Action Reform Act (“CDARA”). The Court determined, in relevant part, (1) that CDARA does not require plaintiffs to present alternative methods of computation of construction defect damages; (2) that noneconomic “inconvenience damages” are recoverable under CDARA; and (3) that plaintiffs are not entitled to prejudgment interest for cost of repair damages if the plaintiffs had not yet actually undertaken the repair and spent money to correct the defect.

In Hildebrand, the plaintiffs, Mark A. and Mark L. Hildebrand, a father and son, purchased a home being built by the defendant, New Vista Homes, LLC. Movement of the basement floor slab damaged the home, and both plaintiffs sued New Vista and its manager, Richard M. Reeves, under CDARA, pleading negligence, negligent misrepresentation, violation of the Colorado Consumer Protection Act, lack of statutory disclosures concerning expansive soils, and breach of implied warranty. Id. *1. The trial court entered a directed verdict for Reeves. The jury found New Vista liable and returned a verdict of $540,754 on all of plaintiffs’ claims. On appeal, New Vista first argued that because the estimated repair costs exceeded the fair market value of the plaintiffs’ home, the trial court erred in not capping repair cost damages at fair market value. Id. *10. The Court of Appeals rejected this argument. Under CDARA, “actual damages” are defined as “the fair market value of the real property without the alleged construction defect, the replacement cost of the real property, or the reasonable cost to repair the alleged construction defect, whichever is less…” Id., quoting § 13-20-802.5(2), C.R.S. (2010)(emphasis added by court). The Court of Appeals determined that because the fair market value of the house was disputed, the trial court did not err in submitting repair costs to the jury. Id. at *11. The Court found that CDARA does not require plaintiffs to present evidence on all three measures of damages included in the “actual damages” definition. “Any one measure could be appropriate, unless another measure is less.” Id. Rather, the defendant, New Vista, bore the burden of proving that the fair market value of the house was less than the plaintiffs’ estimate of repair costs. Id.

New Vista next contended that the trial court erred by awarding inconvenience damages to the plaintiffs under CDARA; the Court of Appeals also rejected this argument. CDARA limits liability of a construction professional to no more than actual damages. Id. at *12. Under CDARA, in addition to damages for defects as previously described, “actual damages” for personal injury means “those damages recoverable by law, except as limited by the provisions of section 13-20-806(4).” Id. quoting § 13-20-802.5(2). CDARA limits damages for noneconomic loss or injury in any action asserting personal injury or bodily injury as a result of a construction defect to $250,000.00. Id. citing § 13-20-806(4)(a), C.R.S. “Noneconomic loss or injury” is defined as “nonpecuniary harm for which damages are recoverable by the person

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suffering the direct or primary loss or injury, including pain and suffering, inconvenience, emotional distress and impairment of the quality of life.” Id. quoting, § 13-21-102.5(2)(b). Therefore, the Court found that the “plain language of CDARA permits recovery of damages for inconvenience.” Finally, the plaintiffs asserted that the trial court erred by denying them prejudgment interest on repair cost damages. The Court of Appeals also rejected this argument. The plaintiffs had not yet repaired the defects and had thus not undertaken the “replacement expenditure.” Id. at *14. The date prejudgment interest begins to accrue is the date the plaintiff undertakes the replacement expenditure. Id. citing Goodyear Tire & Rubber Co. v. Holmes, 193 P.3d 821, 825 (Colo. 2008). Therefore, because the plaintiffs had not actually spent any money to make any repairs as of the time of trial, they were not entitled to prejudgment interest. Id.

2. In AC Excavating, Inc. v. Yale, ___P.3d___, No. 09CA2184, 2010 WL 3432219 (Colo. App. 2010)(unpublished), the Colorado Court of Appeals found that Colorado’s Trust Fund Statute, § 38-22-127, C.R.S., applied to loans that a developer’s manager made to the developer. The Court determined that the Trust Fund Statute does not limit the source or intended use of funds that must be held in trust for the payment of subcontractors. Id. *1. In AC Excavating, a developer, Antelope Development, LLC (“Antelope”), began developing a residential golf course community in the late 1990s. The defendant, Donald Yale, was a 44% shareholder in Antelope. Id. Antelope also formed a separate entity, Antelope Hills Golf Course, LLC (“Antelope Hills”), to build the golf course. In 2005, due to financial problems, Antelope Hills sold the golf course. As part of the sale, Antelope was required to build a retention pond on the property after the closing date. Id. Antelope then contracted with AC Excavating to perform work on the retention pond. Although AC Excavating was paid for some of its work, it had unpaid invoices in the amount of $48,387.80. Id. In 2006, Yale personally loaned Antelope $157,500, which Antelope applied to both general business expenses and to pay some outstanding subcontractor invoices. In late 2006, Antelope’s assets were depleted and it had multiple invoices left unpaid. Yale decided to give up on Antelope and foreclosed on a series of municipal bonds held as collateral for the loans Yale made to Antelope. Yale withdrew $50,000 from the Antelope account to cover the interest on the municipal bonds. Id.

AC Excavating then filed suit against Yale, alleging violations of the trust fund and civil theft statutes. The trial court found that Yale did not violate the statutes and entered judgment in his favor. AC Excavating appealed and asserted that the trial court too narrowly interpreted the trust fund statute; the Court of Appeals agreed with AC Excavating, and reversed and remanded the case. The Trust Fund Statute provides: “All funds disbursed to any contractor or subcontractor under any building, construction, or remodeling contract…shall be held in trust for the payment of the subcontractors…who have furnished laborers, materials, services, or labor…and for which such disbursement was made.” § 38-22-127(1), C.R.S. The Court of Appeals found that a contractor breaches the statute by “diverting the trust funds from the suppliers and laborers on the project to other corporate obligations.” AC Excavating, 2010 WL 3432219 at *2. Furthermore, “unless and until the suppliers and laborers are paid in full, the contractor cannot use any of the funds on a project to pay corporate overhead, compensation, or put them to any other use.” Id. The Court also clarified that a person in complete control of the finances and financial decisions of an entity is personally liable if that entity violates the Trust Fund Statute. Id. Yale argued that the loans he made to Antelope did not fall under the Trust Fund Statute because they were “survival loans” for the company, and were not loans made specifically for the “construction project.” The Court of Appeals rejected this argument, noting that the evidence in the record demonstrated that Antelope was only formed for the development of the project, its business operations only consisted of facilitating the project, and as such, the money that Yale deposited into Antelope’s account “was used to pay bills that

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arose only as a result of the project.” Id. at *5. The Court concluded that “a subcontractor may avail itself of the [Trust Fund] Statute irrespective of the disburser’s intended use for the funds.” Id. at *4. Therefore, the Court reversed the trial court’s ruling for Yale and remanded the case.

3. In Weize Company, LLC v. Colorado Regional Construction, Inc., ___ P.3d ___, No. 09CA1369, 2010 WL 2306413 (Colo. App. 2010)(cert. denied), the Colorado Court of Appeals determined, as a matter of first impression, whether a lien claimant is required to record a lis pendens even though a bond has been substituted for the lien. Id. at *6-7. The plaintiff, Weize, was hired as a plumbing subcontractor by the defendant, Colorado Regional Construction (“CRC”). Id. at *1. When CRC failed to pay Weize, Weize recorded a mechanic’s lien against the project and commenced the action, filing claims for breach of contract, for foreclosure of its mechanic’s lien, and for violation of Colorado’s trust fund statute, § 38-22-127, C.R.S. Id. Weize commenced the action in December 2007, and “before year end,” the trial court allowed CRC to substitute a bond for the lien, and the court ordered the liens released. Id. at *7. Weize never recorded a notice of lis pendens prior to or after the release of the lien through substitution bond. The trial court dismissed Weize’s lien foreclosure claim for failure to record a lis pendens, and the Court of Appeals affirmed.

The Court of Appeals found that, pursuant to § 38-22-110, C.R.S., bonding the lien did not excuse Weize from filing a notice of lis pendens. Id. at *8. Specifically, the Court noted that section 38-22-110, C.R.S. provides: “No lien claimed by virtue of this article…shall hold the property longer than six months after the last work or labor is performed…unless an action has been commenced within that time to enforce the same, and unless also a notice stating that such action has been commenced is filed for record within that time…” Id. at *7 (emphasis added by Court). The Court reasoned that despite bonding, the validity of a lien “would still be of concern to a person interested in title to the liened property because the surety could become insolvent.” Id. Additionally, the Court explained that when the legislature added section 38-22-131 to the lien statutes, which allows a bond to be substituted for a lien, presumably the legislature knew of the lis pendens requirement, but chose not to provide that a bond obviates the need for a lis pendens. Accordingly, the Court of Appeals held that bonding did not excuse Weize from filing a notice of lis pendens even though the lien had been replaced by a bond.

4. In JW Construction Company, Inc. v. Elliott, ___ P.3d ___, No. 10CA0244, 2011 WL 915761 (Colo. App. 2011)(unpublished), the Colorado Court of Appeals determined that the president of a general contractor corporation was not personally liable for a homeowner’s costs and attorney fees awarded upon an excessive lien claim. In JW Construction, the Elliotts hired JW Construction Company, a general contractor, to build their custom home. They entered into a construction contract that provided for fixed prices on certain portions of the work, allowances on other portions, and included progress payments each month based on the “costs actually expended” by JW Construction in the previous month. Id. at *1. The Elliotts paid the first four draw requests, but requested additional documentation for the amounts billed because the documentation submitted did not fully account for the amount billed. JW failed to do so, but submitted two more draw requests. The Elliotts refused to pay them, terminated the contract, and paid JW’s subcontractors directly for the work that was documented in the final two draw requests. Id. The Elliotts also informed JW that it had paid the subcontractors directly for the amounts in the final two draw requests. JW then filed two mechanic’s liens, for the total amount of the final two draw requests, and commenced the action against the Elliotts to foreclose the liens, among other claims. The Elliotts counterclaimed against JW and filed a third-party complaint against Joseph Wodiuk, the president of JW, asserting claims for breach of contract, negligence, and excessive liens.

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The trial court determined that at the time JW filed its mechanic’s liens, it was aware that the Elliotts paid to the subcontractors directly, and therefore, the liens were excessive. Id. at *3. The trial court awarded costs and attorney fees to the Elliotts and against JW pursuant to § 38-22-108, C.R.S. (2010), for having to defend against excessive lien claims. The trial court also imposed personal liability against Wodiuk for the costs and attorney fees awarded on the excessive lien claim. On appeal, the Court of Appeals upheld the trial court’s ruling that the lien was excessive, but determined that the trial court erred in holding Wodiuk personally liable for the awarded costs and attorney fees because he did not record the lien. Id. Rather, JW, the corporation, was the entity that signed the construction contract and recorded the liens. The mechanic’s lien statute, section 38-22-128, C.R.S., states in relevant part that: “Any person who files a lien under this article for an amount greater than is due without a reasonable possibility that said amount claimed is due and with the knowledge that said amount claimed is greater than due…shall forfeit all rights to such lien plus such person shall be liable to the person against whom the lien was filed in an amount equal to the costs and all attorney’s fees.” § 38-22-128, C.R.S. (2010). The Court determined that the plain language of the statute dictates that only the “person who files a lien” is liable for costs and attorney fees. Because a corporation has an independent legal identity, only the corporation is liable for costs and attorney fees, not an officer of the corporation who signed the lien in an official capacity. Therefore, the Court found that only JW, as the corporation, could be liable for the costs and attorney fees.

Legislation:

1. HB10-1394, Concerning Commercial Liability Policies Issued to Construction Professionals: HB10-1394 was codified at §§ 10-4-110.4 and 13-20-808, C.R.S. (2010) and amends Colorado statutory law concerning principals of contract construction and interpretation for commercial liability insurance policies issued to construction professionals.

Section 1 of the Bill, codified at § 13-20-808, C.R.S., imposes the following rules of contract construction to guide a court in such cases: (1) a court should presume that: (a) compliance with a construction professional’s objective, reasonable expectations is intended; (b) the entire policy is to be effective and read as a whole; (c) a just and reasonable result is intended; (d) ambiguity in a policy is to be construed in favor of coverage; (e) a result that renders a part of coverage illusory is not intended; and (f) the work of a construction professional that results in property damage is an accident unless the property damage is intended and expected by the insured; (2) when weighing conflicting provisions, the court should construe the contract to favor coverage; and (3) the insurer bears the burden of proving that a policy provision limits or bars coverage.

Section 2 of the Bill, codified at § 10-4-110.4, C.R.S., voids so-called “super-Montrose” exclusions. Accordingly, section 10-4-110.4, C.R.S. prohibits a professional liability insurer from excluding or limiting coverage of acts arising before the policy is issued unless the insured knows of defects that have a likelihood to subject the insurer to damages and fails to disclose this to the insurer. A policy that conflicts with § 10-4-110.4, C.R.S. is unenforceable.

2. HB10-1278, Concerning the Creation of an Information Officer for Matters Arising Under the “Colorado Common Interest Ownership Act,” and Making an Appropriation Therefor. HB10-1278 was signed by Governor Ritter on June 7, 2010, and went into effect on January 1, 2011. The Bill amends Colorado statutory law under § 12-61-101 et seq, C.R.S. (2010), and creates within the Division of Real Estate, an HOA Information and Resource Center that will be run by the HOA Information Officer. The HOA Information Officer will be appointed by the Executive Director of the Department of Regulatory Agencies and will act as a clearing house

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for information relating to the basic rights and duties of unit owners, declarants and associations. The HOA Information Officer must also track inquiries and complaints relating to HOAs and report annually to the Director of the Division of Real Estate Regarding the number and types of inquiries and complaints received. In addition, the Bill directs the Director of the Division of Real Estate to create a registry for homeowners associations, and requires homeowners associations to register annually.

Submitted by: Andrea M. Bronson, The Holt Group LLC, 1675 Broadway, Suite 2100, Denver, Colorado 80202, (303) 225-8500, [email protected]

Connecticut

Case law:

1. In Suntech of Connecticut v. Lawrence Brunoli, Inc., 2011 WL 2150585, Superior Court, judicial district of Hartford (May 4, 2011)(Robaina, J.) the court ruled that the defendant-general contractor to a construction project with the State of Connecticut Department of Transportation (“ConnDOT”) and its surety, could not be held liable to the plaintiff, its curtainwall subcontractor, for additional costs, expenses, damages and delays which were not caused by the defendant. Although the court acknowledged the plaintiff did not have standing to sue ConnDOT directly under the waiver of sovereign immunity contained in Conn. Gen. Stat. § 4-61 because it did not have a direct contract with the State, the court refused to hold the defendant responsible for the plaintiff’s damages which resulted from other causes simply because the plaintiff lacked recourse against ConnDOT or any other party.

The plaintiff brought suit for damages including unpaid contract work, unpaid change orders and delays. In the subcontract, the plaintiff and defendant assumed to each other the respective obligations and responsibilities between the defendant and ConnDOT under the prime contract, including a clause that damages for delay caused by ConnDOT would not be compensable if experienced during a period the Contractor experienced concurrent delays for which ConnDOT was not responsible. Additionally, the plaintiff was subject to a contractual condition that ultimate authority for the approval and payment of all invoices and change orders remained with ConnDOT. The plaintiff submitted change orders, some of which were approved by the defendant but eventually denied by ConnDOT. All invoices submitted by the plaintiff were forwarded to ConnDOT by the defendant for review and processing. The project, including the curtainwall design and installation, was delayed by numerous causes, including design conflicts, engineering difficulties and the conduct of ConnDOT and other subcontractor; however, there was no evidence that the plaintiff’s delays were caused by the defendant.

The trial court concluded that there was no evidence to find that the defendant was liable for breach of contract as alleged by the plaintiff because the damages and delays claimed by the plaintiff were not caused the defendant and there was no legal principle under which the defendant could be made responsible for delays caused by ConnDOT or others. The court ruled in favor of the defendant and its surety with respect to all of the plaintiff’s claims against them.

2. In Walpole Woodworkers, Inc. v. Manning, 126 Conn.App. 94, cert. granted, 300 Conn. 940 (2011) the plaintiff, a fence-installation contractor, was not allowed full recovery under its contract with the defendant-homeowner, even though it had successfully proved that the defendant raised the Connecticut Home Improvement Act (“HIA”), as a defense in bad-faith. Instead, the plaintiff’s recovery was limited to the value of the work it performed, excluding other

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that would have been damages available under the parties’ contract, but for the plaintiff’s non-compliance with the HIA.

The plaintiff sued to collect the balance due on a contract to install a fence at the defendant’s residence, including interest, costs and attorney’s fees as allowed by the parties’ contract. The defendant raised a defense under the HIA, because the contract did not include the start and completion times for the contract work. As such, the contract was deficient and in violation of the HIA. The trial court found that the defendant had raised the HIA as a defense in bad-faith because the plaintiff had resolved all the defendant’s concerns with the fence and had completed the contract work, yet the plaintiff refused to pay the remaining contract balance. Accordingly, in this case the general rule that a home improvement contractor is barred from recovery where its contract does not conform to the requirements of the HIA was subject to the “bad faith exception” which allows recovery where the defendant-homeowner raises the HIA as a basis to repudiate the contract in bad faith. Applying the bad faith exception, the trial court awarded the plaintiff full recovery under the parties’ contract, including the unpaid contract balance, attorney’s fees, interest and costs.

On appeal, the court relied on prior Supreme Court decisions, ruling that the bad faith exception to the HIA limited the plaintiff’s recovery to the value of the work performed. The court explained that the HIA violations rendered the contract null and void; therefore, the contractual provisions that allowed recovery of attorney’s fees, interest and costs were unenforceable. The court reversed the trial court’s award as to attorney’s fees, costs and interest, but affirmed the award for the balance due on work the defendant had performed.

3. In Cianci v. Originalwerks, LLC, 126 Conn.App.18, cert. denied, 301 Conn. 901 (2011), the court discussed the rule for determining when the “last day” of work occurs for purposes of filing a mechanic’s lien. Pursuant to Conn. Gen. Stat. §49-34, a mechanic’s lien is not valid unless it is filed with the town clerk within ninety days of “performing the services or furnishing the materials.” Although typically the time period for filing a mechanic’s lien commences on the last day on which services are performed or materials are furnished, when work has been substantially completed and the contractor unreasonably delays final completion, the time for filing a lien is computed from the date of substantial completion. The date of the “substantial completion” is used as the starting date for filing a mechanic’s lien when: (1) the contractor has unreasonably delayed final completion, and (2) any services or materials provided by the contractor subsequent to the date of substantial completion were furnished at the contractor’s initiative, rather than at the owner’s request.

In this case, in October 2007, following the signing of a contract between the parties, the contractor demolished the homeowner’s existing house and began new construction. On July 15, 2008, the homeowner notified the contractor to cease construction, because he was concerned about the work being done. On September 19, 2008, the homeowner sent the contractor a list of the deficiencies in its performance, and requested the contractor to advise him when they would be corrected. On September 23, 2008, the contractor returned to the owner’s premises to meet with the supplier and architect, and to examine the property. On October 2, 2008, the contractor returned to the premises again, to pick up and remove remaining tools, materials and scaffolding. The contractor filed the mechanic’s lien within 90 days of September 23, 2008.

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The trial court denied the owner’s application to discharge the mechanic’s lien, concluding that the services rendered by the contractor on September 23, 2008 and thereafter, though minimal, were done at the owner’s request and not on the initiative of the defendant for the purpose of saving the mechanic’s lien.

On appeal, the court affirmed the trial court’s ruling, rejecting the plaintiff’s claim that the contractor’s actions on September 23, 2008 and thereafter were not “services” pursuant to the mechanic’s lien statutes. The court found that that the term “services” in Conn. Gen. Stat. § 49-33 was not plain and unambiguous with regard to whether it encompassed the removal of tools and equipment or inspection of work already performed, therefore, the court turned to legislative history and prior case law to determine the extent of activity encompassed by the term “services.” The court determined that lienable “services” were not limited to those incorporated or utilized in a building or appurtenance and noted that narrow construction of the term “services” would be improper given that that mechanic’s lien statutes should be construed liberally to effect the underlying remedial purpose of providing security for those who furnish service and materials. The court concluded that the defendant’s actions constituted lienable services, because they constituted the laying of groundwork for the physical enhancement of the property, regardless of the fact that the defendant did not continue to perform work thereafter.

4. In Paragon Construction Co. v. Department of Public Works, 130 Conn.App. 211 (2011), the court analyzed the pleading requirements that a public contractor must satisfy when suing the State of Connecticut, in order to present a “disputed claim” under the limited waiver of sovereign immunity contained in Conn. Gen. Stat. § 4-61(a). Section 4-61(a) is the sole statutory waiver of sovereign immunity for public works contract actions, the waiver being limited to contractors who have entered into a contract with the State and who have a disputed claimunder such contract. There is no statutory waiver of sovereign immunity that gives subcontractors who lack a contract with the State the right to sue the State. Moreover, the general rule in Connecticut with respect to pass-through claims against the state is that to maintain a pass-through claim, the general contractor must unequivocally admit or acknowledge liability to the subcontractor whose claim it seeks to pass through.

In this case, the plaintiff entered into a contract with the Department of Public Works (“DPW”) to act as general contractor on a project for the renovation of a correctional center. Thereafter, the plaintiff contracted with a subcontractor for “de-leading” and painting of security bars on windows. After substantial completion, the plaintiff sued DPW for unpaid extra work and delays. In its complaint, the plaintiff alleged claims for breach of contract and unjust enrichment, each claim containing an allegation that the plaintiff was owed money for “de-leading.” After deposing principals for the plaintiff and the subcontractor, DPW filed a motion to dismiss claiming that the plaintiff’s claims were barred by sovereign immunity to the extent based on de-leading, because the plaintiff had not alleged a “disputed claim” under Section 4-61(a) and because the de-leading portion of the claim merely asserted the claim of the subcontractor. The trial court denied DPW’s motion on the grounds that the issue of whether the complaint met the requirements of Section 4-61(a) insofar as it related to de-leading, was a fact-bound issue that precluded dismissal.

On appeal DPW argued that the decision in Federal Deposit Ins. Corp v. Peabody, N.E., Inc., 239 Conn. 92 (1996) applied to the case and that the plaintiff was therefore required to admit liability to the subcontractor to pass through the claim under its own contract with DPW. The court found the reasoning in Peabody to be pertinent to the case, notwithstanding that the court acknowledged that Peabody was factually distinguishable and the court’s opinion did not

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expressly identify how Peabody was to apply. However, the court ruled that the allegations in the plaintiff’s breach of contract claim sufficiently alleged that the plaintiff, not the subcontractor, had a disputed claim with DPW regarding the de-leading, finding minimal consequence in the fact that an invoice from the subcontractor was appended to the complaint as an exhibit. The court further ruled that deposition testimony of the plaintiff’s and subcontractor’s principals was equivocal as to whether the plaintiff had admitted liability to the subcontractor. Therefore, the breach of contract claim could not be dismissed without an evidentiary hearing to resolve a critical dispute as to jurisdictional facts. The court did not say whether the plaintiff was required to allege that it had admitted liability to the subcontractor in its complaint. The court reversed the trial court’s denial of DPW’s motion to dismiss the plaintiff’s unjust enrichment claim, ruling that to allow such a claim would expand the waiver of sovereign immunity in Section 4-61(a) beyond the plain statutory language to include actions “related to or connected with a public works contract” rather than actions directly “under” the contract.

5. In A.M. Rizzo Contractors, Inc. v. J. William Foley, Inc, et al., No. X05-CV-106004577S, 2011 Conn. Super. LEXIS 469, Superior Court, judicial district of Stamford (January 13, 2011) (Blawie, J.), the court analyzed a subcontractor’s statutory and tort-based rights of recourse against a project owner in the absence of a direct contractual relationship between the subcontractor and owner. The plaintiff-subcontractor sued the defendant-owner, a electrical utility company, alleging amongst other things negligence stemming from the defendant’s issuance of allegedly defective site plans to the general contractor, as well as violations of Conn. Gen. Stat. §§ 42-158j(d), 42-158j(b)(4), and 42-158p stemming from the defendant’s failure to pay the plaintiff after receiving written demands from the plaintiff or establish to retainage escrow accounts. The defendant moved to strike the plaintiff’s claims.

As to the plaintiff’s negligence claim, the court denied the defendant’s motion to strike. The court ruled that the plaintiff alleged a valid claim because the owner owed a duty of care to the subcontractor with regard to defective plans and design documents issued by the owner that it knew would be relied on by the general contractor and subcontractors, including the plaintiff. Accordingly, the owner could be held liable for breach of that duty without a direct contractual relationship with the plaintiff.

As to the plaintiff’s statutory claims pursuant to Conn. Gen. Stat. §§ 42-158j et seq, and 42-158p, the court granted the defendant’s motion to strike the plaintiff’s claims for sanctions pursuant to Section 42-158(b)(4) and for violation of Section 42-158p. The court ruled that the plaintiff could bring a claim under Conn. Gen. Stat. § 42-158j(d) against the owner for nonpayment for materials and labor it supplied, but could not recover attorney’s fees and interest under Conn. Gen. Stat. § 42-158j(b)(4) from the owner, because these statutory sanctions only apply to the owner in direct actions by those having a direct contractual relationship with the owner. The court further ruled that Conn. Gen. Stat. § 42-158p, which requires an owner to establish a retainage escrow account, and if it fails to do so, to pay additional interest on unpaid retainage until the contractor’s retainage is paid in full, does not apply to the relationship between the plaintiff and defendant.

6. In Stonington Water Street Assoc., LLC v. Hodess Building Co., Inc. and National Fire Insurance Co., 2011 WL 861688, No. 3:08CV1359 (SRU)(March 9, 2011) (D.Conn), a surety was discharged of its obligations under a performance bond (AIA Form A-312) as a result of the owner-obligee’s failure to comply with the co

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